Exercise 21A-17 a-c On January 1, 2017, Kingbird Co. leased a building to Blosso
ID: 2566534 • Letter: E
Question
Exercise 21A-17 a-c On January 1, 2017, Kingbird Co. leased a building to Blossom Inc. The relevant information related to the lease is as follows 1. The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,800,000 (unguaranteed) 2. The leased building has a cost of $4,300,000 and was purchased for cash on January 1, 2017. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. 4. Lease payments are $275,000 per year and are made at the beginning of the year. 5. Blossom has an incremental borrowing rate of 5%, and the rate implicit in the lease is unknown to Blossom. 6 Both the lessor and the lessee are on a calendar-year basis. 2. The lesed buildngExplanation / Answer
Step 1 : In the Books of lessee the lease is recorded at the PV ol Lease payments as a liability which will be calculated as follows :-
Calculation of PV of Lease Payments (Amount in $)
Thus the PV of lease is $4,562,465 (as the lease payments are paid in the beginning of the year thus the Ist lease is paid on 1/1/17)
Accounting in the books of Kingbird
Journal entry for 2017 (Amount in $)
Accounting in the books of Blossom Inc.
Journal Entry for 2017 (Amount in $)
If Blossom paid $40,000 to real estate broker to find a lessor, then initial measurement of right to use asset will be $4,562,465 (i.e. Pv of lease payments) and the amount of $40,000 is to be charged to Income statement in the same year.
Annual Lease Payments for year 1 to 10 275,000 PVAF(5%,9Yrs) = 7.1078 (275,000*7.1078)+(275,000*1) = 1,954,645+275,000 = 2,229,645 Residual value at the end of lease 3,800,000 PVF(5%,10yrs) = 0.6139 (3,800,000*0.6139) = 2,332,820 Total Pv of Lease Payments 4,562,465Related Questions
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